Exclusion clauses under the spotlight: UCTA reasonableness

In decisions handed down one day apart, the Court of Appeal concluded that a far-reaching exclusion clause which limited liability for negligence was reasonable under the Unfair Contract Terms Act 1977 (UCTA), whereas an exclusion clause in a lease (in the form of a non-reliance clause) was not.

The decisions emphasise that each exclusion clause must be considered in both its contractual and factual context. The Court of Appeal said it was impossible to lay down prescriptive rules to say which clauses will fall on one side of the line and which on the other. Even where UCTA applies, party autonomy and freedom of contract will remain important factors if the parties are of broadly equal bargaining power, as will the ability of the parties to obtain insurance.

The case of Goodlife Foods Ltd v Hall Fire Protection Ltd

Goodlife purchased a fire detection system from Hall Fire on Hall Fire's standard terms and conditions over a year after a quotation was provided to Goodlife. Ten years later, the system failed to prevent a fire and Goodlife brought a negligence claim before the High Court. Goodlife was insured against property damage and business interruption and the claim was a subrogated claim brought by its insurers. Hall Fire argued that an exclusion clause in its standard terms and conditions excluded all liability for negligence. The High Court decided that the exclusion clause was valid and reasonable. Goodlife appealed.

The exclusion clause excluded all liability for negligence and limited liability to the replacement of faulty components. As an alternative to this "basic tender", it offered the option of insurance to be put in place to enable Hall Fire to accept a wider liability, subject to an extra cost that Goodlife would need to pay. Goodlife did not pursue this alternative.

Was the exclusion clause particularly onerous or unusual?

It is a well-established principle under common law, that even if a party knows that standard conditions will apply, a condition which is "particularly onerous or unusual" will not be incorporated into the contract unless it has fairly and reasonably been brought to that party's attention. Goodlife's first contention was therefore that the exclusion clause had not been incorporated since it was particularly onerous and unusual.

The Court of Appeal disagreed. The clause was not buried away in small print, but was one of the conditions expressly referred to on the front of the quotation and was also identified at the outset of the standard terms and conditions. It would therefore be "commercially unrealistic" to suggest that it "was not fairly and reasonably brought to Goodlife's attention".

Was the exclusion clause reasonable?

Goodlife's claim that the exclusion clause was unreasonable under UCTA also failed. The Court of Appeal considered that the parties were broadly equal in terms of their bargaining position and that they knew that Hall Fire had not assumed liability for future events. It also held that Goodlife was aware of the exclusion clause and could have pursued the alternative option offered by Hall Fire or could have used another supplier. The parties' contractual relationship therefore presented a sensible allocation of risk.

In addition, Goodlife's insurance position was a critical factor in favour of Hall Fire's case as UCTA takes account of the availability of insurance in the determination of whether a contract term is reasonable. According to the Court of Appeal, Goodlife would be best placed to obtain insurance as it operated in a hazardous environment and had knowledge of the premises and the effects that a fire would have. In fact, Goodlife did have insurance against damage and business interruption in the event of a fire.

The reasonableness test under UCTA has also recently been applied by the Court of Appeal in respect of a non-reliance clause in a lease. The dispute arose as a result of a misrepresentation (relating to environmental problems affecting the property) in replies to pre-contract enquiries before the tenant entered into a lease of warehouse premises. In the legal proceedings that followed, the landlord sought to rely on a non-reliance clause providing that the tenant had not entered into the lease in reliance on the representations made by the landlord. It also alleged that the clause merely set out the basis on which the parties had contracted (rather than it being an exclusion clause falling within the Misrepresentation Act 1967).

The Court of Appeal held that the non-reliance clause did fall within the ambit of the Misrepresentation Act 1967 and would therefore need to satisfy the reasonableness test under UCTA in order to be effective. Although both parties were legally advised and had knowledge of the effect of their agreement, it was decided that the clause was unreasonable. The critical factor in the Court of Appeal's decision was the importance of pre-contract enquiries in the conveyancing process. If the clause was effective in excluding liability, said the Court of Appeal, those replies would become worthless. (For a more detailed analysis of the case, please see our previous article).

Practical considerations

It goes without saying that where an exclusion clause is contained within standard terms, it must be brought to the other party's attention, especially if it is particularly broad. Suppliers are advised to follow Hall Fire's example of flagging exclusion clauses at the outset of their standard terms (in what the court considered to be in almost "apocalyptic terms").

In relation to the issue of reasonableness, the differing judgments by the Court of Appeal confirm that it is impossible to set down prescriptive rules; each exclusion clause has to be considered in both its contractual context and its factual context. The courts will be slow to intervene in freely agreed commercial contracts between parties of broadly equal size and bargaining power - however, this may not always be the case especially where an exclusion clause is too broad and undermines a fundamental industry standard (in the First Tower case, pre-contract enquiries).

The Court of Appeal's decision in Goodlife shows that, the parties' insurance position will also be a critical factor. For this reason, it will always be preferable to consider which party is best placed to insure against a risk.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.